In recent years, there has been a revolutionary change in accounting that has introduced a new take and perspective in accounting – Profit First Concept. Most business owners tend to underpay or take no pay at all just to sustain the whole business or reinvest everything back into it. In profit first, we believe that entrepreneurs should be paid fairly as well, and looking at bank account balances should not be a headache anymore!
What is Profit First?
Generally, Profit First can be seen as a reverse process of the conventional accounting method. It requires business owners to take profit from each individual sale before considering the expenses, which means business owners should “pay themselves first before considering operation”.
In conventional accounting, we are taught that basic accounting is
Sales-Profit = Profit
However, in Profit First accounting, the formula is modified into
Sales-Profit = Expenses
In essence, you are using what is left after deducting everything to pay off your expenses, which will definitely be a shocker to most businesses in the first few months of implementation. However, most businesses ended up gaining much more benefit in the long run as they are much more attentive towards their expenses.
How Does It Work?
In simple terms, you’ll be splitting your funds into 5 bank accounts frequently after your receive cash from your single business account. The bank accounts are used and labelled as:
- Profit
- Owner’s Pay
- Taxes
- Expenses
- Business Development
The amount for each account is predetermined by a percentage, known as TAPS (Target Allocation Percentages). The percentage is different based on your revenue and the nature of your business. However, do not use the pre-allocated funds for uses other than the intended use, as it breaks the whole system and defeats the purpose of Profit First.
What Are The Benefits Of Profit First?
Business owners have the tendency to spend money on what they think is right or whatever the amount, which traditional bookkeeping has encouraged unintentionally. However, Profit First acknowledges the tendency and eliminates it by strict allocations and ensuring profit before investing, making sure your business is gaining profit.
Here are a few reasons why profit first is able to help your business:
Ensures Business Owners Get Paid Fairly
In most businesses, the owner is severely underpaid or even unpaid because of the lack of planning. Owners tend to always reinvest and spend more in the company, while not getting paid properly as they always spend it off. With profit first, owners are getting paid a certain percentage in every sale, ensuring owners are paid properly.
No More Tax Issues
Always spending money on your business, and horrified to find out that you do not have enough money to pay taxes? Profit First requires the business to allocate a certain percentage for every sale, making sure you do not get tax issues when it’s due.
Preventing Impulse Decisions
Profit first is a type of framework that confines you in terms of your spending ability. Most people feel the urge to spend when they see money in their bank account, as it is a natural tendency to do so. Profit first takes the essential amounts away from your bank account instead of a lump sump, which leaves you with the money you are actually able to spend.
Ensuring Profit
The whole point of Profit First is in the name – Profit! The Profit First method ensures business earns a profit at the very start using the allocation framework. It also ensures that you do not spend the profit away unintentionally.
Conclusion
In short, Profit First is definitely a good framework to be implemented, regardless of the size of the business. Get in contact with your local accounting firm to know more about profit first accounting, however, do note that not all accounting firms offer Profit First services.